Vodafone's Indian synergies come at a high price

FILE PHOTO: A retail shop owner speaks on his mobile phone outside his closed shop shutters painted with an advertisement for Vodafone at a market in Chennai, India, December 30, 2013.Babu

HONG KONG (Reuters Breakingviews) - Vodafone has its eye firmly on the top spot in India. A $23 billion merger of the UK-based telecom giant’s Indian operations with Idea Cellular will create the nation's top mobile operator amid a bloody price war. The structure is less than ideal, however, because it aims to satisfy both companies, and give a big say to an Indian tycoon all at once.

The problem was a simple merger of equals would have left magnate Kumar Mangalam Birla with just 21 percent of the enlarged entity through his Aditya Birla Group, which owns 42 percent of Idea. Indian rules mean Birla needed a 26 percent stake to have a big voice in the business. This way, Birla will be the chairman and ABG can appoint half the non-independent directors.

Vodafone is bending significantly to make the union happen, however. It is contributing a larger mobile business - with a slower decline in its EBITDA - at an agreed enterprise value of $12.4 billion, compared to just $10.8 billion for Idea. But Vodafone will walk away with just 45.1 percent of the enlarged entity. Vodafone has also agreed to jointly exercise the voting rights it holds in excess of ABG until the pair find a way to equalise them at some point over the next 10 years.

To compensate Vodafone for the difference, Idea will contribute an additional stake in a telecom-towers business, which might be worth $1 billion, and a bit less net debt. Vodafone will also get a 51 percent premium on a 4.9 percent stake, which it will sell to ABG for $579 million.

The resulting minority shareholding lets Vodafone deconsolidate the unit, taking some $8 billion of debt off its balance sheet. But overall, the contortions are a high price for operating and capital expenditure synergies, even those with a net present value of at least $10 billion. There's no obvious way for the two sides to resolve future disagreements over strategy, for example.

The bigger worry is that the new group, which will remain highly levered with net debt of at least at 3 times forecast EBITDA, will still not be in a much better position to take on upstart Reliance Jio. That group, backed by India's richest man, continues to give away its service for free and helped trigger consolidation in the first place.

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